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Glossary
Derivative
Definition
Instruments that are constructed (derived) from another security. For example, CFDs are contracts derived from underlying assets, such as physical stocks.
What is a derivative?
A derivative is a financial instrument whose value comes from the value of an underlying asset, index, or interest rate. Common types of derivatives include futures, options, and swaps. They can be used for hedging risk or for speculative purposes.
Why are derivatives important to consider when trading?
Derivatives are important in trading as they offer tools for risk management and can provide leverage, potentially leading to high returns. However, they also come with high risk, especially when used for speculation. Understanding derivatives is crucial for traders to exploit market inefficiencies, hedge against price movements, and diversify their portfolios—but this requires a good understanding of the underlying assets and market conditions.